In step 18 we looked at starting a weekly finance review and what to focus on during that weekly half an hour, to ensure you stay on track for that month’s spending, bills and goals.
Today we are going to take this one step further, by starting a monthly finance review, in addition to your weekly review. Whereas the weekly review is incredibly useful to ensure you achieve your monthly goals, the monthly review helps you to achieve your longer term goals that you set out to achieve, such as becoming debt free, getting to a certain net worth or saving a specific amount of money. It is the moment to plan and look ahead a little further and to readjust your goals and spending patterns.
During most months you can probably combine every fourth weekly review with your monthly review, although for your monthly analysis you will need to set aside more time, as you are analysing the entire past month and also looking further ahead. I recommend scheduling in roughly 2 hours every month to complete this step. Continue reading →
From the previous step you are now up to speed about the positive effect of extra payments on outstanding debts. That leads us to the current step: start paying off a debt. You might think you are already paying off a debt, or several of your debts, but the point here is that you are going to pay off a debt faster by making higher monthly contributions than the minimum required.
When you pay off a debt faster than scheduled, a few amazing things happen:
You end up paying less interest, resulting in a lower amount of money paid back overall;
It takes less time to pay back the loan, meaning you can tick it off your list a lot sooner;
Psychologically it is a great relief to have paid off a debt: one less thing to worry about;
It increases your motivation by showing you that you can achieve your goals;
And here’s a great thing: once you’ve paid off a debt, that monthly amount you poured into this debt suddenly becomes available, which you can then use in its entirety to pay off another debt, meaning it keeps up that momentum!
After some rather depressing news to do with debt and interest, it is again time for some uplifting information. In this step we are going to look at how powerful it can be to put extra money towards paying off a loan and how much it reduces not just the time spent on paying back the money, but also the total amount paid back.
This information will hopefully inspire you to find ways of making extra payments towards reducing your debts. As even if they are small extra payments, in the long run, thanks to that friend of ours called compound interest, it will have a huge effect.
Let’s go back to the same example as the one I used in step 21 to illustrate how credit cards work, in which we looked at an outstanding debt of $1000, at a 1,5% monthly interest rate and a payback rate of 3% with a minimum of $10. But this time you make an effort each month to pay the minimum amount (3% of the outstanding debt) and an EXTRA $25 on top of the minimum amount. Let’s see how this works out. Continue reading →
It’s time to start looking at an area of your finances that makes many people nervous, scared and / or depressed, leaving them ignoring rather than analyzing and planning how to deal with that very same area: debts.
Yet in order to become financially independent and in total control of your finances, it is important to understand how debts work and how even seemingly small debts or amounts can make a tremendous difference to your long-term finances.
In step 4, you listed all of your debts, so you should have a good idea of how much debt you have and how much you are paying towards amortizing these loans. In this current step we are going to look at the effects of debt and how much extra you end up paying on any long-term debts. Continue reading →
You have probably heard about compound interest, and might even feel you understand the notion of compound interest quite well, but since it is the key concept in some of the next steps and because the impact of compound interest over time might be far bigger than you realize, this entire step is dedicated to looking at how compound interest works.
In finance compound interest is one of the most powerful factors at work that by using time as it catalyst, can do one of two things:
keeping you poor by losing money on outstanding debts
making you richer by making more money with the money you already have
Let’s look at how compound interest works and how it generates this power over time. Continue reading →
No matter how organized you are and how carefully you have planned and budgeted for the next month, there will always be surprises that come up and hit you financially at unexpected and often inconvenient moments: a car maintenance or fix that you hadn’t planned for, a plumbing issue that needs immediate attention, a sudden vet bill for one of your pets or your washing machine that suddenly breaks down. I am sure you can think of many occasions and examples that could suddenly happen and throw you off-track.
If you don’t expect an expense to come up, often times you won’t have the money available, and you will either be forced to borrow money, eat into your savings or cut out money elsewhere.
In this step you are going to set up and build an emergency fund, in which you have a certain amount of money put away that you can use in case of these unforseen but needed expenses that come up. In that way you don’t need to worry about scraping the money together, you can just pay the bill and get on with your life. A good amount to aim for is generally $1000 or the equivalent in your currency. Whenever you take money out of this account, you aim to get it back up to the $1000 as soon as possible afterwards. Continue reading →
By now you have (hopefully!) been tracking your expenses for a while so you should have a reasonably good idea of your spending. Ideally you would have at least 1 month’s worth of data to look at, if you have more than a month that’s even better. In the next few steps we will be looking at your expenses in detail to get a better idea of where your money is going, how much you spend on various categories and most importantly, whether this spending pattern is aligned with the way you WANT your money to be spent.
The first action step will be identifying the different areas that you are spending your money on by categorizing various expenses into groups, which will allow us to analyze in which areas of your life there is a potential to save more (or less) money. Continue reading →